NetSol Technologies, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2018; filed February 13, 2019. The interim consolidated financial statements are unaudited. NetSol provides enterprise software, licensing, maintenance, implementation, consulting, BPO and IT services primarily to the global automobile financing and leasing industry.
Financial performance and position
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Net revenue | $17.0 million | $14.4 million | $33.4 million | $27.3 million |
| Gross profit / margin | $8.9 million / 52.1% | $6.7 million / 46.3% | $17.1 million / 51.2% | $11.5 million / 42.2% |
| Operating income (loss) / margin | $2.2 million / 12.9% | $0.3 million / 2.2% | $3.8 million / 11.3% | $(0.8) million / (2.9)% |
| Net income attributable to NetSol | $2.9 million | $0.6 million | $3.8 million | $0.3 million |
| Basic and diluted EPS | $0.25 | $0.06 | $0.33 | $0.02 |
| Adjusted EBITDA, net | $4.1 million | $2.1 million | $6.3 million | $3.1 million |
License revenue increased materially to $4.8 million in the quarter and $10.8 million year to date, primarily from NFS Ascent contracts in China. Services revenue declined on a reported basis, while maintenance revenue was broadly stable. Asia-Pacific generated 81.9% of quarterly revenue and 82.5% of year-to-date revenue. Daimler Financial Services represented 31.6% of year-to-date net revenue, creating significant customer concentration.
Reported results included foreign-currency gains of $2.5 million for both the quarter and six-month period. The company recorded equity-method losses of $0.3 million for the quarter and $0.6 million year to date related to its WRLD3D investment. Net income included $1.5 million and $1.8 million attributable to non-controlling interests for the quarter and six-month period, respectively.
Cash flow, liquidity and debt
- Cash and cash equivalents were $20.3 million at December 31, 2018, compared with $22.1 million at June 30, 2018.
- Operating cash flow was $3.2 million for the six months ended December 31, 2018, compared with $(2.1) million in the prior-year period.
- Investing cash outflow was $2.0 million, including $1.4 million of capital expenditures and $1.0 million advanced under a WRLD3D convertible note.
- Financing cash outflow was $0.4 million. Total loans and capital lease obligations were $8.0 million, including $7.6 million current and $0.3 million long term.
- Current assets were $52.3 million versus current liabilities of $19.9 million. Accounts receivable and related-party receivables totaled $10.8 million; revenues in excess of billings totaled $13.9 million.
- Approximately $19.0 million of cash was held by foreign subsidiaries and approximately $19.0 million of foreign deposits were uninsured.
- Management expects approximately $2.5 million of capital expenditures over the next 12 months for business development and infrastructure, funded from operations if available.
- The company reported compliance with applicable borrowing covenants and no defaults.
Material changes and unusual items
- The company adopted ASC 606 using the modified retrospective method on July 1, 2018. The adoption reduced opening NetSol accumulated deficit by $5.8 million and non-controlling interest by $3.0 million, with a total equity reduction of $8.8 million.
- ASC 606 changed the timing and allocation of revenue, particularly for contracts containing licenses, maintenance and services. Under prior GAAP, 2018 six-month revenue would have been approximately $33.8 million rather than $33.4 million, based on the filing’s reconciliation.
- Contracted but unsatisfied performance obligations were approximately $84.1 million at December 31, 2018. Management expects approximately $13.9 million to be recognized over the following 12 months, with the remainder over an estimated six years.
- Other comprehensive loss attributable to NetSol was $0.9 million for the quarter and $0.2 million for the six months, primarily reflecting foreign-currency translation losses. Accumulated translation losses were $28.4 million at December 31, 2018.
- NetSol issued 191,841 shares during the six months for officer, director and employee services, valued at approximately $0.9 million in total. Stock-based compensation expense was $0.9 million.
Outlook, commentary and risks
Management stated that its outlook for continuing operations remained optimistic and highlighted new NFS Ascent and LeasePak contracts, expansion in China and Europe, additional Daimler implementations, and investment in innovation resources in Pakistan and Thailand. The company signed a five-year China contract valued at approximately $30 million and cited additional contracts with expected values of approximately $425,000 and $500,000 over their respective terms.
Management identified growth opportunities from automotive technology, connected vehicles, artificial intelligence, cloud services and demand from global auto finance companies. The filing does not provide formal quantitative revenue or earnings guidance.
- Results are highly exposed to foreign-currency movements, particularly the Pakistan rupee; currency gains materially increased reported other income in the current periods.
- Operations are concentrated in Asia-Pacific and revenue is concentrated with Daimler Financial Services.
- Potential risks include customer payment delays, restricted liquidity, geopolitical instability, terrorism, Brexit and trade uncertainty, Pakistan rupee devaluation, changing automotive demand and technology shifts including autonomous vehicles.
- Revenue recognition requires significant judgments regarding standalone selling prices, contract combinations, project progress, estimated costs to complete and variable consideration.
- The company held approximately $3.2 million of WRLD3D convertible notes receivable and reported a $2.7 million WRLD3D equity-method investment at December 31, 2018; collectability, conversion and investment performance should be monitored.
- Legal proceedings and risk factors were reported as none in Part II of the filing, although ordinary-course claims and tax assessments remain possible.
Investor verification checklist
- Verify the sustainability of revenue growth from China license contracts and the timing of the $84.1 million remaining performance obligations.
- Separate recurring operating performance from foreign-currency gains and assess sensitivity to further Pakistan rupee movements.
- Review Asia-Pacific and Daimler concentration, including termination or module-withdrawal provisions in the Daimler contract.
- Assess collections and contract-asset balances, including $13.9 million of revenues in excess of billings and foreign uninsured cash.
- Evaluate WRLD3D note collectability, security, maturity and potential conversion outcomes.
- Confirm future capital spending needs, debt maturities, covenant compliance and the effect of the pending lease-accounting standard.
- Reconcile reported results with prior-GAAP comparability because ASC 606 materially affected opening equity, contract balances and revenue allocation.